XM at Retail

The retail numbers for XM in July were the weakest since 2004. Part of this is driven by a deeper penetration in the OEM channel. If a consumer already has satellite radio capability in their car, they have no need to buy a device at retail. However, XM's retail presence has been weaker than Sirius' for two years now, and they have only been above 40% NPD share in 5 of the last 13 months.

What investors should be prepared for is a Q3 where XM could potentially report negative retail net additions. In Q2, XM netted a bit over 38,000 net additions from the retail channel.

Unless August and September carry a big boost from the July numbers, it is very likely that XM will go negative in this retail net addition metric.

In the overall scheme of things, what matters is that the company is adding subscribers, but sector watchers should prepare themselves for what is surely to be a weak retail reporting from XM. There is potential that the market will not react well to this news, and knowing it is coming gives an investor an advantage.

Does the potential that a negative retail number change my strategy on XM or the sector? No. I believe that the long term prognosis for satellite radio is good, and even better with a merger.

Sirius is coming out with a new Stiletto, why isn't XM coming out with a new Inno? No doubt the retail segment will live off of innovative portable radios in the future. Also Tyler, do you see satellite radios having cellphone capabilities in the future as well? If Apple can do it, why can't Sirius?

No New XM Portable

In my opinion there is one reason why XM is not coming out with a new portable:

The RIAA Law Suit

If XM were to make a new portable to the standards and capabilities of the Stiletto line, they would risk admitting that what they did with the Inno was wrong, and that would not bode well for the RIAA law suit.

If they come out with a new unit that is still against the law in the eyes of the RIAA, they risk adding to their potential liability if the law suit proceeds.

Ever since the RIAA sued, XM has been handcuffed with regards to the portable market.

They made an Error in judgement

When XM developed the Inno they wanted some capabilities that were not present on the S50.

1. The ability to have an artist seek

2. The ability to record blocks, and VIEW the songs recorded and SAVE those songs without having heard them as originally broadcast.

If you notice, the S50 did not have artist seek. The RIAA feared that someone would be able to get the entire U2 collection (for example) in a short timeframe without additional fee. Sirius agreed to keep artist seek off of the S50. XM insisted that it be available on the inno.

With an S50 you could record blocks of songs, but could not view and scroll through what was recorded to cherry pick your favorites. Thus, if you recorded 4 hours of a channel, you would have to play the block to be able to record it. Thus, you would play the block. If you did not like the first song, you could skip forward, if you liked the second song, you could hit the love button and save it (takes about 10 seconds). One the heart disappeared from the screen, you could fast forward to the next song and so on and so forth. Getting 10 songs saved from 4 hours of block recording takes about 5 minutes, BUT you at least had to listen to the content (or part of it) to accomplish it.

With the inno, record a four hour block, then scroll through the songs on your screen, save the ones you want. You can save 10 songs in about 2 minutes. BUT, you never actually even made an attempt to listen to the song as it was originally broadcast.

XM was rumored to offer the RIAA an additional bounty of $3 per inno (on to p of the $15 bounty Sirius was paying) for these added capabilities. The RIAA said no. XM went forward anyway. The RIAA sued for $100,000 per saved song.

In my opinion, the benefits of these two capabilities were not worth the risk taken. In particular, the second capability, which consumers would have never even known to ask for (it did not exist on any unit prior to the Inno).

Thus, each inno that is sold adds to the potential liability in the RIAA suit. Makes it hard to promote a product when each one you sell could be used against you in the suit.

Now, they are in a pickle. Can't make anything new, and gunshy of pushing the existing product because of liability. Additionally, if they lose, they may have to update receivers via firmware taking away these capabilities. Now they will have angry consumers on their hands.

I hope XM wins the case, but the length of time this case is taking is now taking a real toll on XM.

I saw Mel talk about the RIAA at one of the early Congressional hearings for the merger on CSpan. Its tough to remember but I believe he said he came to an agreement for Sirius portable (Stiletto) and his preference is to come to agreements not to fight things out in court.

I would be very surprised if Mel, as CEO for the combined company, doesn't come to some sort of agreement on the XM issue with the Inno. This is ridiculous. You come out with 0 new wearable products because you are fighting a lawsuit? Come on!!! Thats not good business! Thats ridiculous!

If it is going to hurt you THAT badly, update the damn recievers via firmware update over the satellite to have the same functionality as Sirius' device. I understand you are going to have angry customers, so assign them a credit of some sort, such as 6 months of service free. It will be much cheaper than paying the RIAA their rediculous fee (which I doubt they would be awarded anyway) and allow them to come out with new recievers.

Here is a problem though: Why put out portable recievers for Christmas when you plan to have your merger completed by then unless you have a way to update them to recieve both signals? I understand you do not want to be "forgotten" by the retail public, but I am a part of that retail public and do not want to find out that the reciever I just bought was obsolete even before I bought it. THAT would piss me off. Remember, you have to protect the public from their own stupidity. That is the law. (IE: Warning Coffee is HOT on the cup of steaming coffee at McDonalds)